Playing roulette with long-term care

By Scott Burns |
December 4, 2012

A patient gets help in the waiting room of a clinic. Many insurance companies have been de-emphasizing or withdrawing altogether from the long-term care insurance market. Scott Burns wonders if this is something to worry about.

It sure is quiet. In most years my mailbag will have a healthy dose of questions about buying long-term care insurance. This is entirely reasonable. On the one hand, our ever-lengthening life expectancies result in an increasing probability of needing long-term care. On the other hand, some of the insurance industry's most active marketing efforts went into the sale of long-term care policies.

But this year is different. The only reader questions have come from people who already owned long-term care policies. Those readers were trying to figure out whether to continue, or drop, their policies after receiving notice of major premium increases. Not a single reader wrote to ask about whether a salesperson's proposal was reasonable, probably because so many insurance companies have been de-emphasizing or withdrawing altogether from the market.

Genworth, the largest vendor of long-term care insurance, announced major premium increases and a variety of other changes to tighten access to policies. Some companies have stopped selling group policies. Others have stopped selling individual policies. So it is possible that even if you wanted a policy, you might not be able to get it.

Tragic? Not necessarily

This is not a tragedy. The idea of long-term care insurance is a good one, but it's really a shame it has been in the hands of, well, the insurance industry. In good times, insurance companies have piled into the market, overestimating the number of policies that would be dropped before claims were made. At the same time they, like everyone else, overestimated the return they would earn on those premiums. The result was artificially low premiums.

Now, in bad times, the industry is facing low returns on premiums and worse, a high rate of policy retention. The result is a big squeeze - more claims against less income. Bottom line: As an actual product, long-term care insurance is a great idea, poorly executed.

Let's get rude

So let's ask a rude question: Is the fast fade of long-term care insurance something we should worry about? Here are my tough-hearted reasons that it isn't.

1 Most people have minimal assets to protect. As a result, Medicaid is their future if they ever need long-term care. Sorry, there is no way to sugarcoat this; it's the way it is. Since Social Security benefits account for at least 50 percent of income for 65 percent of all retired couples and individuals, paying for long-term care through assets or insurance isn't possible for most retirees.

1 You don't have to be in the 1 percent to self-insure. If your retirement income is large enough to support your household in long-term care, you will likely be OK if you need it. In 2011, according to the American Association for Long-Term Care Insurance, the average annual cost of assisted-living communities was $40,000 a year. The average annual cost of nursing homes was $76,285 a year. Retirees with incomes that high aren't common, but when you add in drawing down assets for a period of time, this could be as much as 25 percent of all households.

1 Death may eliminate the need. Just as financial planners often want us to be 95 percent certain of having money for a 30-year retirement when we have only a 16 percent chance of still being alive after 30 years, the reality is that (a) most people will die before needing care, or (b) they will need care for only a short time. Among women, who are more likely than men to need care because they live longer, only 12.4 percent of those age 75 will need care for more than two years. Only 3.9 percent will need it for more than five years. For men, the figures are much lower. This suggests that playing Russian roulette with long-term care is a lot safer than playing Russian roulette with a revolver.

1 The Continuing Care Retirement Community alternative. You can receive guarantees of lifetime care by becoming a member of a continuing care retirement community. These residential communities bundle senior residences, assisted living and nursing care in a single property to provide a continuum of care. You become a member with a big initial payment and a monthly payment for a broad package of services. Some of the initial payment may be returned to your estate upon death.

Given the uncertainties we all face, perhaps we should change how we confront major life issues. Rather than think about insuring against change, perhaps we should think about learning how to adapt to change.